Should IKEA ‘Table’ India?

With approximately 500 million young adult consumers in India[1] and an affluent growth rate of 13% equaling USD 203 billion,[2] it would appear that Sweden-based IKEA can’t afford to delay its entrance into India any longer. A country that is accustomed to paying a higher price for the niceties that are afforded around the world, India has an educated, innovative, resource-rich base ready to ‘spend.’

In January 2012, the Indian government amended FDI restrictions to allow foreign companies to own 100% of their retail ventures in the country. This was a welcome change from the earlier ownership cap of 51%, as it paved the way for global retail chains like IKEA, Wal-Mart, and others to have full control of their Indian operations. But the market opening came with new restrictions that many retailers view as obstacles to its investment, including a requirement that foreign companies obtain at least 30% of their products from domestic small companies and cottage industries. In light of this rule, IKEA has expressed that local sourcing requirements were “concerning” and more easily met by food retailers such as Carrefour than a single-brand company like IKEA with global product ranges.[3]

With approximately 500 million young adult consumers in India[1] and an affluent growth rate of 13% equaling USD 203 billion,[2] it would appear that Sweden-based IKEA can’t afford to delay its entrance into India any longer. A country that is accustomed to paying a higher price for the niceties that are afforded around the world, India has an educated, innovative, resource-rich base ready to ‘spend.’

In January 2012, the Indian government amended FDI restrictions to allow foreign companies to own 100% of their retail ventures in the country. This was a welcome change from the earlier ownership cap of 51%, as it paved the way for global retail chains like IKEA, Wal-Mart, and others to have full control of their Indian operations. But the market opening came with new restrictions that many retailers view as obstacles to its investment, including a requirement that foreign companies obtain at least 30% of their products from domestic small companies and cottage industries. In light of this rule, IKEA has expressed that local sourcing requirements were “concerning” and more easily met by food retailers such as Carrefour than a single-brand company like IKEA with global product ranges.[3]

It is no surprise from a recent FT article[4], which noted Sweden’s methodical internationalization and India’s “flip” decision by the Prime minister regarding this 30% requirement, that India and Sweden as countries are cultural opposites when it comes to their view of time. With India valuing a fluid, multi-focused present as how time “rolls” and Sweden valuing a more fixed, singular-focused and future orientation, the two countries view the world from very different “clocks.”[5]

Calculatingly, to meet this requirement IKEA has set targets to double its Indian sourcing to 1 billion Euros (about $1.3 billion) in the coming years. The company is already a large buyer in India, sourcing cotton textiles, rugs and plastics from 80 suppliers to support global sales. Plans to source ‘made in India’ cutlery, pots, pans and LED lights are underway, as well as plans to utilize Indian services and IT infrastructure in the future. To facilitate supplier development, IKEA has hosted a series of meetings with suppliers of metals, plastics and other textiles from around India to educate them about its supplier requirements and audit processes. Dozens of suppliers flew in from around the country to learn about IKEA’s requirements indicating that local suppliers are lining up to work with the Swedish giant.[6]

Even before local content requirements were implemented, IKEA had expressed plans to purchase more from India in order to decrease dependence on Chinese manufacturers, which account for over 20% of the company’s worldwide purchases.[7] In addition to diversifying their sourcing profile, IKEA has set its eye on India to lower costs since Chinese labor unrest and the rising value of the Yuan have increased operation costs for the company. Domestic content requirements may assist IKEA in cost reduction efforts, as India offers access to high-quality and inexpensive raw materials like wood, iron, and other fine fabrics needed in furniture and home decor products. Additionally, improved manufacturing capabilities have allowed suppliers to achieve economies of scale and vertical integration, further lowering costs and allowing increasing control of manufacturing and supply chain processes.

As the third largest market in Asia, it’s obvious why IKEA is keen to begin operations there. The initial difficulty in moving away from their tried and true supply chain model likely seems daunting to IKEA, though they may not be seeing the hidden benefits. They must continue to innovate and resist the temptation to behave dogmatically in regards to the local sourcing requirement. As a result IKEA will likely acquire new and transferable skills that they can apply to other developing markets moving forward and assist in growing the local economy. One possible solution to the sourcing requirement would be for IKEA to enter into a joint venture with a local Indian manufacturing organization. If done properly, IKEA could mitigate its risk by leveraging the local knowledge that IKEA lacks. This worked well for Allianz Group of Germany in its successful joint ventures with Bajaj FinServ in the insurance industry.[8] The relationship with the right local organization could give IKEA insights into a variety of business functions in the Indian economy. These insights might include from where exactly to source locally, how to build a functional local supply chain, management techniques for local employees, as well as assisting in handling the local bureaucracy and regulatory environment.

India is still a developing nation that presents a great opportunity for multinational enterprises (MNEs) like IKEA to invest in this untapped “bottom of the pyramid” market. It is a great location for outsourced labor-intensive service functions because the nation has a highly skilled workforce and inexpensive labor costs.

IKEA already has plans to invest more in the country so this would be a practical expansion opportunity. The question remains: is IKEA’s future-oriented planning in line with India’s present-day and more reactionary methods of making infrastructural decisions based on needs now?

This market presents a unique opportunity for retailers to tackle the challenges faced in sourcing quality materials to bring to market. IKEA’s approach to producing high quality, low cost products is by focusing on the “price tag” first, and then building a quality product around that price point. This is known as the “IKEA Range.” Most products are developed and produced in Sweden. Their experience in sourcing raw materials and finished goods locally does not extend very far. IKEA product developers and designers will decide to source from local manufacturing companies that produce sustainable raw materials, which can be used to create their finished products.

Further complicating the potential strategy, how will India feel about innovation with local resources, by non-local talent? Potentially, it may not be a problem. The key will be that IKEA truly understands the Indian consumer. For example, “One IKEA product developer decided to use a door as a tabletop when he toured a door factory that used board-on-frame construction - a layering of sheets of wood over a honeycomb core that gives a strong, lightweight structure with a minimal wood content. This type of construction is cost-effective and environmentally friendly and is used today in IKEA products such as the LACK table from 1980.”[9]

Sometimes IKEA will work with factory management to manufacture an entirely different raw material that can be produced using their current machinery. “IKEA designers do their part to keep prices low by using production capabilities from other areas in unique and previously unimagined ways - like having a shirt factory produce furniture upholstery.”[10]

If IKEA has to source 30% of its raw materials or finished goods from the local market, it challenges the concepts behind their current business strategy. However, if IKEA can find a partner that has vast local knowledge and connections with people and organizations in the manufacturing sector, they will be able to overcome the negative stigma of this 70/30 product sourcing requirement.

IKEA, in the context of an intermediary organization, could be the catalyst of change in India which could gain them competitive advantage. Potentially, as a by-product of working with the government on logistics, India’s infrastructure could see much needed improvements that will ultimately help make supply chain processes for other companies more efficient. This positive change will help change the public’s outlook on foreign MNEs for the better in India, and could open more doors to accessing this thriving, growing and increasingly selective consumer base.

While this 30% feels significant to IKEA, it appears to pale in comparison to the 13% affluent growth rate and easy access to creating loyalty amongst a key segment of the 500 million young consumers in India.

How many potential new IKEA customers does this represent and if delayed, what will take the place of IKEA for “today’s” purchases for the middle-class Indian home?

Will the traditional local Indian-made hard-wood table remain the family “center” or will IKEA, with India’s involvement and all its resources, create a new kind of table for future families?